Cash flow is the lifeblood of your business. In other words, it’s one of the most critical components of your success or failure. Over the years, academic studies have found that problems in the cash flow of small businesses are the main reasons for their ruin or bankruptcy. Without money in cash, big incomes don’t have any meaning. Many businesses that are profitable in paper end up in bankruptcy because the amount of cash inflow doesn’t compare with the amount of money going out. Also, a company without proper cash management may not have the ability to invest and thus compete, or may even have to pay more when asking for a loan. This is why we are here to help you optimize and increase cash flow in your small business.
What Is Cash Flow?
Before we fully immerse in the subject, it is necessary to know what cash flow is. It is simply the in and out movement of cash in your business. It’s controlled weekly, monthly or quarterly. There are essentially two types of cash flow:
- Positive cash flow: When the cash received from sales, accounts receivable, etc., is higher than the quantity of cash that is going out for accounts payable, monthly spending, salaries, etc.
- Negative cash flow: When the cash outflow is higher than the cash inflow. This generally means problems for a business, but there are measures you can take to fix the situation and generate or collect more money in cash, with either cutting or eliminating some costs.
Achieving a positive cash flow isn’t something you only get by chance. You have to work for it. It’s necessary to analyze and manage the cash flow to have higher efficiency in the control of inflows and outflows. The majority of the accounting software packages oriented for small or medium sized companies will help you make a cash flow statement. There are also many online websites that offer free templates to facilitate your job.
What’s the Difference Between Cash Flow and Income?
Another concept that needs to be managed is “income”. It is important to know that it is not the same as cash flow. In fact, income, as defined by the rules of accountability, is simply the result of the revenue minus spending. But the cash flow of small businesses, or companies in general, results from many other financial figures, including accounts payable, capital spending and debt services. Smartly managing the cash flow of small businesses implies focusing on each one of these elements.
Surely, the cash flow of small businesses must be positive to generate income. If we apply the logic, we will understand that you need enough money to pay employees and suppliers that do or facilitate the process to elaborate and sell products. This sale of products is what helps generate income. But if the company doesn’t have enough money (cash flow) to make the product, then there will be nothing to sell, therefore there will never be an income. Hence the importance of structuring a company correctly to have a positive cash flow.
The whole process of watching a business grow is circular: You must dispose of cash to make investments and carry out certain spending; this will lead to upgrades, that will lead to higher income, new cash flow, and successful growth. The cash flow of small businesses can be seen as a tool to achieve goals.
Business owners can usually see growth as a solution to the cash flow problems, since making a business grow also increases your money in cash. However, there’s a risk of not managing yourself correctly during the process of growth, when the disbursement of cash is constant and, many times, in advance.
Learn here in depth the difference between cash flow and profit
How Can You Increase Cash Flow?
There are some practices that can be used to better administrate and increase cash flow in your small business.
Action #1: Review and quicken the accounts receivable
To increase cash flow in small businesses, the first option is to quicken the receipt and the process of the accounts receivable. You can use strategies that will facilitate the traffic of money towards the company without bothering the client. For example, you could:
- Enable mailboxes attended by banks so that clients in remote locations can send payments by mail.
- Request previous authorization or confirmation from clients for your checks so banks can process them in fewer time intervals.
- Centralize your bank accounts.
- Provide your clients with various forms of payments: transfers, checks, cash and credit card.
- Offer discounts to clients if they pay their bills quickly.
Here you can find 15 ways to manage your accounts receivable
Action #2: Adjust requirements for sales by credit
Companies frequently have to extend their clients credit, especially when they’re beginning to grow. Nevertheless, the cash flow of small business can be vulnerable and prone to vanish in credit sales. Therefore, it’s necessary to previously investigate the risk of extending each client’s credit. It’s necessary to know if they can pay their bills on time or if their business is really growing. Perhaps they really have problems with liquidity and could use the growth as an excuse to evade payments. It’s advisable to make detailed reports about the client in question and ask them to fill out a credit form. You could also consult the references. Another option to improve the income by credit is by accepting credit cards. This will cost a percentage, generally of two or five percent of each sale, but it could be a safer bet to receive payment for a sale at the moment.
Action #3: Increase sales
This is an obvious recommendation, and surely you already had it in mind. If you need more money in cash, it seems elemental to attract new clients or sell products or additional services to your current clients, even though this could be more complicated than it sounds. Obtaining new clients is essential for a growing business, but it can take time and money to realize sales. On the other hand, selling new products to existing clients can result to be cheaper and more achievable. However, it’s possible that increasing sales on the same client could only increase the accounts payable and not the cash flow if these sales are by credit.
Action #4: Offer discounts and promotions
One strategy to increase the cash flow of small companies is by offering discounts and promotions to clients if they pay on time or ahead of time. This practice can affect your margin of income. Incentivizing the clients to make payments before the required billing cycle can also help manage your cash flow. Your company can also take advantage of this mechanism to pay its own suppliers and debts ahead of time. But be cautious, so that these early payments don’t leave you with a deficit on the cash flow.
Action #5: Constantly monitor your cash flow position
A number of accounting software packages have in-built cash flow monitors, so you can get daily, weekly or monthly reports on how much you owe, and how much is owed to you. Using a monitor (even if you do it by hand) will keep cash flow in the forefront of your mind, and your actions. Every company, big or small, must know each month what their closing cash balance is and how they want to close next month. This will help project themselves, plan, and correct situations that they don’t want to be repeated. When you manage your cash flow efficiently, it’s easier to make business decisions about the expansion of the company and the maintenance of the bills and existing clients.
Learn here how to prepare a cash flow forecast
Action #6: Make sure your customers and clients pay on time
They buy from you, you deliver, they should pay. When they know you expect them to pay on time, they are more likely to do so. If you have a cash business, it is easier – they pay at the time, or they hand over a credit card, and you get paid a discounted amount in a day or two.
If you run a business where you invoice your customers, make sure they know when a payment is due, and that you expect them to pay. You are not an interest-free lender, and you should not allow any customer to take advantage.
Here you can learn how to decide the payment terms for your business
Action #7: Agree on sensible ways to get paid sooner
You may decide to discount invoices that are paid in 15 days, not 30, for example. If you do this, only do it for your best customers. Let other customers earn the privilege. You may offer a discount for payment by order, or you may require a deposit up front in certain cases.
These two ideas may eat into your profits, but they may minimize the interest you pay to your own lender. They may enable you to negotiate a discount with your own suppliers for paying them early, so your profit does not suffer. If you get paid sooner by more customers than you pay your suppliers, you may win both ways.
Action #8: Slow your outgoings
Even though you get some or all of your customers to pay on time, see if you can (without upsetting your suppliers) delay your own check-writing. If you have more coming in than going out, your cash flow will be good.
Action #9: Raise your prices
One way to manage cash flow is to have more cash coming in for the same amount of product or services going out. This keeps your accounts payable costs down but boosts your receivable accounts. Are there special services, benefits or product packages you can sell for a higher price? Customers pay on perceived value, so if they perceive they are getting more, they may as well pay more.
Action #10: Factor some invoices
One way to improve cash flow is to “sell” some or all of your invoices to a factoring company. It works as credit cards do. You raise an invoice, your factoring company pays you a discounted amount in a few days, and they collect the full amount from your customer in 30 days. Your cash flow is good even though you lose some profit.
There are a number of ways a small business can manage cash flow. The essential point is that you must do it all the time, not just occasionally. These 10 ways are all tried and tested. Modify them to suit your own business, and you will find they are all easy ways for a small business to manage and increase cash flow.
A business loan can be an excellent way to increase cash flow. You can use the funds from a business loan as working capital to finance the daily operations of your business and keep optimal performance. A business loan from Caminal Financial is a great choice: our quick funding process within 4 days after approval will guarantee that your company doesn’t suffer from a shortage of cash flow. Simply submit this online application to know instantly if you pre-qualify.